Market overview and company operations
Target Corporation is one of the leaders in retail industry who operate within the United States market. The US market is the largest in the world though it can be considered to be saturated and mature in regard to retailing activities (Brigham & Houstonm, 2009, p.23). The retail arena is characterized by a range of companies which have created intense competition. The competition ranges from Wal-Mart, K-Mart/Sears, Walgreens, JC Penny, Cotsco, Big Lots, and many other medium-scale retailers (Dowling et al. 2010, p.4). This market also constitute of internet retailers from other parts of the world. With the stable economy being the key factor in the success of retailers, the market is always threatened by the entry of new retailers who further intensify the competition. Many competitors have been on the track for ongoing success by developing their brands, designs and mergers with other business entities, in an effort to offer new and fashionable products at discount prices.
Target Corporation is an upscale retail store that offers trendy, high quality products at discount prices. It is a one stop departments store offering all basic commodities and required supplies of common consumer. Products range from groceries, foods, beverages, shoes, apparel, electronics, supplies, and many more consumable goods. The company’s basic operations involve three major segments; Super Target offering a full-line grocery store, Target retail operation, and Target.com, an online retail store (Target Corp, 2010, p.6). The other key business of the company is the Target Financial Services which involves the Target Visa card and Target Red businesses. The company engages in full innovation and improvement of its products and initiatives in order to cumber the competition. Other operations involve marketing initiatives such as campaigns and advertisements. The company partakes corporate responsibility initiatives such as charitable contributions and environmental activities. Target operations are aimed at enhancing the competitive advantages that eventually determine its profitability as reflected in its financial position (Chalfin, 2006, p.89).
Target Corporation financial ratios analysis
Basically, very many ratios have always been used to analyze the financial position of many companies but in this study, the ratios will be categorized as profitability, asset utilization, market value, liquidity and debt management ratios (Griffin, 2009, p.36).
Liquidity ratios are often used to assess the ability of a company to adequately fulfill its short term obligations and are calculated from the balance sheet of a company (Heisinger, 2009, p.56). This clearly shows that the ratio can be used to gauge a company’s business worth as per the given FY. From the calculated fiscal ratios, the current ratio for Target significantly improved from 1.60 to 1.66 in the financial years 2008 and 2009 respectively but declined slightly afterwards, from 2009 through to 2010 financial years. However, the decline in the fiscal 2010 current ratio level of 0.87 did not match the FY 2008 level. Conversely, the quick ratio for Target deteriorated across the financial periods under examination. To be precise, this company’s quick ratio went down from the fiscal 2008 value of 1.03 to 1.02 recorded in the FY 2009, before a further decline to 0.99 in the FY 2010.
The profitability level is normally a major concern to every company because most outside investors deposit their moneys in such companies with optimism of generating profits on the invested equities. From Target financial reports, it emanates that returns on equity (ROE), return on assets (ROA), and net profit ratios considerably declined from the financial years 2008 to 2009, but improved from the 2009 to 2010 fiscal years. For instance, through these three consecutive years, ROA were 10.38%, 8.01% and 8.61 % in the fiscal 2008, 2009, and 2010 respectively, while ROE were 18.61%, 16.15% and 16.21% across the same periods. The higher positive percentages signify that the invested money performs well despite depicting unstable returns trends across the periods under study.
Asset utilization ratio is considered essential since it can purposely be used to evaluate a company’s ability to meet both long-term and short-term obligations (Mott, 2008, pg.93). Hence, from the computed financial ratios, the stock movement as shown in the inventory turnover level significantly increased from 6.45 times in the FY 2008 to 6.83 times recorded in the FY 2009. The inventory turnover value posted in the FY 2010 went down by 0.48 times when compared to that reported in the previous year, 2009. It is important to note that higher turnover ratios signify the speed at which the manufactured products swiftly move out of store (Feroz & Raab, 2003, p.16). Further, a company’s ability to utilize the employed assets to satisfactorily earn good returns can be gauged in its total assets turnover levels. From the computed financial ratios, the level of fixed asset turnover and assets turnover ratios across the three consecutive periods steadily increased except a slump reported in the fiscal 2009 in the value of fixed assets returns. For example, in the fiscal 2008, 2009, and 2010, fixed asset turnover values were 2.47, 2.44 and 2.50 while the values for asset turnover across the same period were 1.42, 1.47 and 1.48 respectively. These ratios basically appraise the yield percentages received per dollar of an asset, and can be used to measure a company’s efficiency with regards to the generation of profits from the available assets. Therefore, from the performance ratios calculated, it is evident that Target generated increasing returns from the employed assets (Holton, 2006, p.212).
Debt management ratios are extensively used to evaluate a company’s leverage. A company with higher debt ratios is seemingly more vulnerable to economic meltdown as it has been witnessed with most collapsed businesses. This is ideally true since such a company tend to continuously service its debts no matter the threats emanating from low sales. Considering, Target debt ratios, it emanates that receivable turnover, steadily increased showing that sales surpassed debts across the years being examined. For example, in the fiscal 2008, 2009 and 2010, receivable turnover rose from 7.33 times to 7.42 times to 8.29 times respectively. Conversely, debt to total assets and average collection period remained below the recommended values despite showing unstable trends in the three consecutive periods. For example, in the fiscal 2009, debt to total asset ratio was 0.43 and this showed an elevation down from 0.38 reported in the fiscal 2008, and further decline to 0.38 posted in the FY 2010. For this reason, it is noticeable that Target Corporation seems to have had sound fiscal year reports than Wal-Mart from the periods examined. See appendix one for the calculated ratios.
Wal-Mart Corporation Ratio analysis
From the computed three consecutive fiscal years financial ratios, Wal-Mart liquidity ratio has been expressed in terms of the current and quick ratios (Wal-Mart, 2010). The current ratio for this company remarkably improved from 0.82 to 0.88 in the FY2008 and 2009 although the ratio deteriorated from 0.88 to 0.87 in the fiscal 2009 to the fiscal 2010. Current ratio, being a ratio that measures Wal-Mart’s ability to pay its liabilities while they mature both in the long-run and short-run periods, the persistence of any declining trends in this ratio in the future would imply that this company is declared insolvent. Conversely, the returns on equity as well as the returns on assets as shown in Wal-Mart’s computed quick ratio depicts some significant improvements across the periods being studied. For example, in the financial periods under assessment, Wal-Mart quick ratio escalated from 0.23 to 0.26 in the fiscal 2008 and 2009 and further increased in the fiscal 2010 to 0.27.
Wal-Mart profitability can be gauged through net profit ratio which declined from 3.54% to 3.43% in the fiscal 2008 and 2009 but increased to 3.7% in the FY 2010. Higher net profit percentage implies that the company is financially sound whereas lower percentages show that the company cannot control its inventory costs which in return results into higher commodity prices (Ingram, Albright, & Baldwin, 2004, p.54). In contrast, both returns on assets (ROA) and returns on equity (ROE) showed steady improvements throughout the three fiscal years namely 2008,2009 and 2010 whereby the reported ROA were 13.42%, 13.94% and 14.03% while reported ROE were 19.70%, 20.53% and 21.10% respectively. From these positive financial return ratios, it is clear that Wal-Mart is performing well with the investors’ money, and this can be shown in the levels of extra values generated on shareholders economic resources.
Wal-Mart asset utilization as indicated by the assets turnover shows incredible improvements across the fiscal 2008, 2009 and 2010, whose particular values were 2.28, 2.45 and 2.49. This shows that this company is able to adequately meet its obligations both in the long-run and short-run periods. Moreover, this company’s stock has been smoothly moving because the inventory turnover significantly increased from 8.14 times to 8.81 times to 9.19 times in the FY2008, 2009 and 2010. Despite showing a decline of 0.16 in the fiscal 2010 down from an improvement of 0.26 reported between the fiscal 2008 and 2009, fixed assets turnover remained positive and above the recommended levels.
Wal-Mart debt management ratios show that this company’s leverage is quite viable since its debt to total asset considerably declined across the study periods. For instance, in the fiscal 2008 and 2009, the debt to total assets decreased from 0.27 to 0.25, and the ratio further declined to 0.24 in the fiscal 2010. This implies that the company has been able to tame its total debt levels while increasing the quantity of assets (Hughson et al., 2006, p.49). The average collection period and the receivable turnover which shows the ratio of sales to debtors imminently declined across the fiscal 2008, 2009, and 2010. This means that sales have surpassed debtors by far in daily undertakings. From the computed inventory turnover ratios, it is apparent that Wal-Mart has been capable to adeptly clear and restore its stocks across the fiscal 2008, 2009 and 2010. (See appendix two for the calculated ratios.)
Contrasting the financial ratio and trend analysis for Target to Wal-Mart
From the computed financial ratios, Target liquidity ratio as expressed by the current ratio evidently exceeds that of Wal-Mart under the periods being studied. For example, in the financial year 2010, Target current ratio significantly declined in comparison to the fiscal 2009 value, although the fiscal 2010 current ratio value stayed above the fiscal 2008 attained figure. However, despite the illustrated decline, it radiates that Target current ratio seems to somewhat higher than that Wal-Mart, its immediate competitor by about 0.76 (derived from 1.63-0.87). Liquidity and profitability ratios are deemed as primary measures that can be used to assess these companies’ capacities to pay or satisfactorily meet their short-term commitments or current liabilities as they mature (Haber, 2004, p.119). As shown in the three consecutive years computed financial ratios, it emanates that Target has higher capacities to settle down its current liabilities while they mature when contrasted to its closest rival in the industry, Wal-Mart.
Moreover, as indicated in the debt management and asset utilization ratios and trend analysis, it appears that Target reveals high level of competence in meeting the incurred short-term liabilities as they become fully-fledged using the most liquid assets (Newton, 2009, p.130). In essence, companies’ most liquid assets include debtors (account receivables), cash at bank as well as cash in hand. Hence, consistent with the financial and operational analysis of asset utilization and debt management, Target manages its shareholders current economic resources much more effectively and successfully than its fellow industrial competitor, Wal-Mart. Therefore, in the consumer service industry, Target emerges to be better placed than the other market rivals in terms of profitability, liquidity, asset utilization and debt management.
Comparing Wal-Mart and Target Corporation to the Consumer Services industry
Regardless of the verity that Target materializes to be better positioned than its market competitors in terms of its liquidity levels, the figures of the current assets are far away less than the recommended market levels. For example, it is an obligation that any company’s costs outlay levels with regard to the current assets ought to be at some rates not below twice the overall level of short-range debts (Elliott, 2008, p.98). For that reason, apropos Target financial performance operational levels, it is fundamental that counteractive actions be applied by the company’s executive board to ascertain that its business continues flourishing in the projected future. Furthermore, as indicated by the financial ratios trends available in appendices, the competitor, Wal-Mart shows some perfection in asset utilization while Target depicts a declining proficiency in its overall asset usage. For illustration purposes, it is true that the stock conversion frequencies as regard to Wal-Mart case have considerably increased from the FY 2008 all through to the FY 2010 devoid of any decline. Basically, the stock turnover ratios measure the rate at which a given company is capable of converting its available stocks into sales.
From the computed financial ratios, the debtors’ turnovers portray ratio increments with regard to Target and a declining trend in Wal-Mart’s case across the fiscal periods under assessment. For example, Wal-Mart computed ratios confirm a decrease from 102.79 in the FY2008 to 101.70 in the FY2009, but this figure further declined in the fiscal 2010 to 98.51. In the analysis of a company’s financials, debtors’ turnover rate explains the frequency upon which a company is able to reconvert the accounts receivables. From the ratios of debtor collection periods, Wal-Mart figures show a large increment across the 2008, 2009 and 2010 financial periods. Basically, these ratios illustrate the duration that a given business would take to recuperate its outstanding amounts from the clients who bought the supplies on credit.
In order to have an effective future operation, a company’s debt collection period must be reduced. This is because delayed debt collection period accrues to unhealthy business operations for all companies and the industry itself i.e. the capital operations are held in that company’s account receivables for quite a long time (Siegel & Shim, 2006, p.385). Moreover, inefficiencies often accrue in such circumstances since the capital held up are perceived to be in account receivables form and this could have been devoted in other profitable business ventures to create additional revenues to the company. Similarly, long term debts usually take longer collection periods, and a result they frequently become written-off in many occasions. Hence, as shown in the computed monetary ratios, Wal-Mart utilizes its assets more effectively in contrast to Target when examining the two market rivals financial trend analysis under cross-industry performance.
From the profitability outlook, it is evident that these companies experienced declines in the income levels from the FY 2008 to FY2009 whereby Wal-Mart reported a drop of 0.11% between fiscal 2008 and fiscal 2009, and a 0.27% increase in the FY 2010. Conversely, Target profitability level between the fiscal 2008 and 2009 declined from 4.5% to 3.41%, but thereafter improved to 3.81% in the fiscal 2010. A company’s unsound profitability level as depicted in this two case proves to be very unfavorable to the overall performance as it discourages savoir-faire investors from aggressively playing their roles in the company’s operations (Frakes, 2005, p.297). Thus, since the profit margin ratios confirm the revenue generated from certain sales levels, they worth appraising to help resolve the current problems at hand.
In contrast, the return on assets (ROA) could effectively be used to illustrate a business entity’s proceeds relative to the level of total assets (Thukaram, 2007, p.101). It might also be used to estimate the future revenue generation which would ensue from employing definite amounts of economic resources. From Target calculated financial ratios, it is clear that the company generates sufficient incomes by employing the available total assets when compared to its competitor, Wal-Mart. Therefore, based on the cross industry analysis, Target seems to be a promising investment option in terms of profitability (Nikolai, et al., 2009, p.100). This is because financiers are expected to obtain more profits and higher capital returns in this publicly traded company when compared to those investing in Wal-Mart.
These companies show growths in debt levels as illustrated in the calculated debt ratios given in the periods under assessment (Spires, 1999, p.260). These debt ratios ideally show the companies levels of debt financing in comparison to the investors gearing or equity. The debt ratios can be used when measuring these companies’ long term solvencies. As depicted by the computed debt- total asset ratios, there are remarkable declines in Wal-Mart debt management ratio across the financial periods under study. The ratio went down to 0.25 in the FY 2009 from 0.27 in the FY 2008, before further declining to 0.24 in the fiscal 2010. The decline shows how leveraged Wal-Mart is. In contrast, Target debt-asset ratio significantly improved from 0.38 in the fiscal 2008 to 0.43 in the fiscal 2009, but declined in the fiscal 2010 to 0.38. These finely tuned leverage ratios levels confirm that both Target and Wal-Mart over hinge on debt financing in carrying out the financial operations.
From the industrial data, the two companies appear to be leaders in stock market (NYSE), as well as in the commodity and service market. Therefore, loaning out money to such credible companies cannot be a big deal since they have proved their abilities reimburse the borrowed funds. For example, Target has a market capitalization of approximately $ 35.16B, whereas Wal-Mart boasts of a market capitalization of $185.79 billion. Moreover, both companies are listed in the London Stock Exchange. Based on these operational and financial performances, the consumer service industry has a probable prospect in terms of profitability, liquidity, debt management, asset utilization, and market dominance (Feroz & Raab, 2003, p.126).
Conclusion
Despite the apparent analysis of various companies’ fiscal reports, it is worth noting that Target financial and operational reports are incredibly pleasing. Any investor making a transactional decision rooted in a company’s present information ideally wants to set off faster than others. Under operational and financial analysis, Target has portrayed its potentiality to be much more profitable. The profitability analysis depicts that Target generates higher profits than other market competitors and the trend would probably persist in the future. Moreover, the company has shown the ability to effectively utilize the available resources in rewarding the investors, and this confirms the capacity to pay its total acquired debts from the current assets. The company is a credible investment source for savvy investors due to its overwhelming liquidity position.
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